5-Year Earnings Growth Rate Calculator
Results
Total 5-Year Growth: %
Compound Annual Growth Rate (CAGR): %
Understanding the 5-Year Earnings Growth Rate
The 5-year earnings growth rate is a critical metric used by investors, business owners, and analysts to measure how much a company's or individual's income has increased over a half-decade period. It filters out short-term volatility and provides a clearer picture of long-term financial health.
The CAGR Formula
To find the 5-year growth rate, we typically use the Compound Annual Growth Rate (CAGR). Unlike a simple average, CAGR accounts for the effect of compounding over time. The formula is:
CAGR = [(Ending Value / Beginning Value)1/5 – 1] x 100
How to Calculate It Step-by-Step
- Identify Values: Get the earnings from the first year (Year 0) and the final year (Year 5).
- Divide: Divide the Ending Value by the Beginning Value.
- The Root: Raise that result to the power of 1/5 (which is 0.2). This represents the five-year duration.
- Subtract One: Subtract 1 from the result to find the decimal growth rate.
- Convert to Percentage: Multiply by 100 to get the final CAGR percentage.
Example Calculation
Imagine a company had earnings of $100,000 in 2018. By 2023 (5 years later), their earnings grew to $161,051.
- Division: 161,051 / 100,000 = 1.61051
- Power of 1/5: 1.610510.2 = 1.10
- Subtract 1: 1.10 – 1 = 0.10
- Result: 10% Annual Growth Rate
Why 5 Years?
One year of high growth could be a fluke. Ten years might include outdated business cycles. A 5-year window is considered the "sweet spot" for fundamental analysis because it is long enough to show a trend but recent enough to be relevant to current market conditions.